Yuan jumps to 2-week high after US inflation, market eyes policy loan rollover

China's yuan jumped to a two-week high against an easing dollar on Friday, as investors embraced cooling US inflation data, which fuelled market expectations for slower Federal Reserve interest rate hikes.

The dollar languished after the US inflation data came in softer than expected, raising market hopes that inflation may have peaked and that the Fed will begin scaling back its hefty interest rate increases. [FRX/]

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 7.1907 per dollar, 515 pips or 0.7% firmer than the previous fix 7.2422.

Friday's guidance rate, the strongest since 31 Oct, recorded the biggest one-day strengthening in percentage terms in nearly six months.

Traders and analysts said the official midpoint came in largely matching their projections to reflect the broad dollar weakness in global markets. Friday's fixing was 17 pips weaker than Reuters' estimate of 7.1890.

In the spot market, the onshore yuan opened at a more than two-week high of 7.1600 per dollar before changing hands at 7.1710 by midday, 135 pips firmer than the previous late session close. If the yuan retains all the gains at the late night close, it would have gained 0.3% to the dollar for the week, its second straight weekly rise.

Several currency traders and analysts said gains in the yuan were capped as market participants remained cautious about a PBOC policy loan rollover on Tuesday and recent surges in Covid-19 cases across the country.

"The stabilization of (yuan) versus the USD actually opens the door to PBOC monetary easing in the near future," Ju Wang, FX strategist at BNP Paribas.

A batch of 1 trillion yuan ($140 billion) worth of medium-term lending facilities (MLF) is due to mature on Nov. 15, and some investors expect the heavy maturity could prompt the PBOC to lower the amount of cash banks must set aside as reserves.

"The earliest timing of the reserve requirement ratio (RRR) cut could be the next 1-2 weeks," economists at JP Morgan said in a note, adding they have priced in a 25-basis-point RRR cut for the remainder of this year.

China, along with Japan, has been a major outlier amid global tightening to tame high inflation, with Beijing focused more on reviving an economy hurt by Covid shocks. But monetary policy divergence with other economies could stoke depreciation and capital outflows risk.

Separately, Chinese authorities stepped up Covid-19 lockdowns and other curbs to halt clusters from spreading as China's case load soared to its highest since this year's Shanghai lockdown. Both Beijing and Zhengzhou are seeing record daily cases.